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European Union: Publication of Financial Sector Assessment Program Documentation—Detailed Assessment of Observance of the CPSS-IOSCO Principles for Financial Market Infrastructures

Summary: EXECUTIVE SUMMARY Euroclear Bank is a securities settlement system that contributes to the safety and efficiency of global markets for government bonds and other international securities but also concentrates systemic risk. It is one of the largest securities settlement systems worldwide with a daily average settlement value of around 1.1 trillion euro, providing settlement services for securities from 44 markets in 53 currencies. In particular, Euroclear Bank services the largest, global banks with tri-party repo arrangements to secure their interbank financing. As a default of Euroclear Bank has the potential to highly disrupt global financial markets adequate risk management is necessary. Operational risk is significant but appears to be well-controlled through appropriate risk measures such as contingency plans and back-up facilities allowing for timely completion of settlement processes. A delivery-versus-payment settlement model is in place that mitigates the risk of a participant losing the value of the transaction. Under its banking license Euroclear Bank offers banking and credit facilities that are linked to its custody and settlement functions. Its credit exposures are managed by a combination of credit limits and—in principle—full collateralization. Euroclear discloses information to allow its participants to accurately identify the risks and costs associated with the use of the system. Euroclear Bank’s risk framework is generally sound. Euroclear Bank should become operationally ready to fully implement plans for recovery and the orderly winding-down of operations. In anticipation of the emerging international regulatory standards and frameworks on recovery and resolution of FMIs, Euroclear Bank has developed recovery plans and plans for the orderly winding down of its operations. It should now, in particular, take measures to be operationally ready for their full implementation. Euroclear Bank and the NBB should accord a high priority to addressing this issue as the disorderly failure of Euroclear Bank would likely lead to systemic disruptions to the institutions and the markets it supports, linked payment systems, CSDs and CCPs, and to the financial system more broadly. Important risk measures have been taken to reduce credit risk, but further improvements are needed to comply with the international standards. Euroclear Bank has recently improved the quality of its collateral and liquidity management frameworks. Credit risks are apparent in the current practices for asset servicing. EB should address this credit risk for its normal settlement activities and should also adopt measures to mitigate similar credit risks for settlements done via the bridge with Clearstream Banking Luxembourg (CBL) which necessitates a review of the link agreement with CBL. Also, EB has no tools in place to identify, monitor and measure risks from tiered participation, which is a requirement of the new international standards. Another necessary improvement relates to the frequency of the reconciliation of positions. Eurobonds––that represent more than half of the deposited value––are reconciled on a daily basis. For other securities positions are reconciled on a weekly or monthly basis, which can be a potential source of uncertainly related to the integrity of the securities issues. EB should introduce daily reconciliations of positions for all securities.